Can a Health Savings Account (HSA) Be Used for Wealth Accumulation?

Posted By Sarah Kaufman || 8-Aug-2014

For Clients, Advisors, Community

The tax code allows a family to save $6,550 (on a pre-tax basis) in a health savings account. These accounts are designed to cover deductibles and co-pays in a health care plan with cost sharing and relatively high deductibles. Is it better to fund an HSA pre-tax or a savings account after tax?

Fund an HSA or Taxable Account? If a family contributes the maximum to an HSA for 25 years and reinvests the tax savings, they will have $615,488. If the same funds are contributed to a taxable account (on an after tax basis), the total is $387,345. Clearly, the after-tax account is the winner.

If the family has an HSA, should medical expenses be paid from the HSA or out of pocket?

If the family has the discretionary cash, it’s a good idea to pay medical expenses such as deductibles and co-pays out of pocket and let the HSA grow. In this way, an HSA can become an accrual device. Investing the tax savings as well, it’s possible to accumulate $615,488 over 25 years (assuming 35% income tax bracket, 3.5% medical inflation, 20% capital gains rate and HSA return of 6%).

Who should consider using an HSA as a wealth accumulation device? Those families who are already taking advantage of other tax benefits including maximizing their 401(k) or IRA contributions and who are otherwise financially stable should take advantage of this benefit.

One example: Post retirement medical costs are always a challenge no matter you level of wealth. Using the HSA for financial growth allows a family to prepay a fund for medical and other expenses to be used at older ages. It is another tool for significant wealth accumulation.

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